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Scandal: Congressional Enrichment From Legal Insider Trading

By Kerri Shannon, Associate Editor, Money Morning

Original title:  While the Middle Class Suffers, Congress is Getting Richer – With Help From Legal Insider Trading.

While many Americans continue to struggle to save money, members of Congress are getting richer.

Roll Call analysis of Congress members’ financial disclosure forms showed their collective net worth was more than $2 billion at a minimum in 2010 – a 25% leap from 2008. Minimum net worth in the House of Representatives rose to $1.26 billion, with minimum Senate net worth at $784 million.

With a median net worth of $891,506, Congress members are nine times wealthier than the average American household – and some Congressional leaders are exceedingly richer.

About 11% of Congress has net worth of more than $9 million, landing them in the top 1% of America’s wealthy.

And these numbers aren’t even the whole picture. They don’t include members’ homes and other non-income-generating property, which could add hundreds of millions of dollars to total net worth.

Congressional leaders’ presence in the top 1% is one of the catalysts that angered citizens enough to start the global “Occupy Wall Street” movement. It also has prompted a closer look at how these elected representatives are gaining such riches, especially on an annual salary of $174,000.

According to a CBS News “60 Minutes” segment that aired Nov. 13, congressional “insider trading” might be a key factor in their financial success. Congress members may be using information gained from their “insider” positions to make highly profitable trades in the stock market.

This form of insider trading may be unethical, but it’s also legal.

“This is a venture opportunity,” Peter Schweizer, a fellow at Stanford University’s conservative think tank the Hoover Institutiontold “60 Minutes” correspondent Steve Kroft. “This is an opportunity to leverage your position in public service and use that position to enrich yourself, your friends, and your family.”

Congressional “Insider Trading”

Schweizer has extensively reviewed Congress members’ financial disclosure records for his book, “Throw Them All Out,” released this week. He wanted to know how our elected representatives manage to accumulate so much wealth while in office.

Schweizer found that congressional representatives were trading stocks related to hot topics being discussed and debated in Congress before information had been disclosed to the public.

“We know that during the health care debate people were trading health care stocks,” Schweizer said to Kroft. “We know that during the financial crisis of 2008 they were getting out of the market before the rest of America really knew what was going on.”

Take for example Rep. Spencer Bachus, R-AL, chairman of the House Financial Services Committee. According to the “60 Minutes” report, Bachus attended closed-door briefings in September 2008 with then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. Congressional leaders in those meetings were warned that a “global financial meltdown” was about to occur.

The next day, Bachus bought stock options that allowed him to profit if and when the economy tanked.

Bachus’ office released a statement that he never trades on nonpublic information, or in financial services stock, but a disclosure showed he turned a profit trading General Electric Co. (NYSE: GE) during the financial crisis.

Such an action by a corporate executive, executive branch member, or federal judge would fall under insider trading, a punishable criminal act.

Just ask Galleon Group founder Raj Rajaratnam, who was sentenced Oct. 13 to 11 years in prison, the longest-ever sentence for insider trading. Rajaratnam’s position as a $7 billion hedge fund manager qualified him as an “insider” who used nonpublic information to net $64 million.

Congressional leaders, however, even though privy to non-public information, are not considered corporate insiders, and can trade on such information and escape penalty. Congressional staffers and lobbyists also are exempt.

Bachus is not the only representative highlighted in the report.

Rep. John Boehner, R-OH, was one of the members of Congress who bought health insurance stocks during the 2009 healthcare debate. Boehner fought against a government-funded insurance plan that would compete with private companies, which rose in share price after the provision died in Congress – and after Boehner bought the related stocks.

Former Rep. Dennis Hastert, R-IL, made $2 million from selling land he owned after receiving a federal earmark to build a parkway near his property. Former Sen. Judd Gregg, R-NH, helped get $70 million in funds to go toward redeveloping a U.S. Air Force base in which he and his brother had a commercial interest. And Rep. Nancy Pelosi, D-CA, bought shares of the 2008 Visa Inc. (NYSE: V) initial public offering (IPO) while legislation affecting credit card companies was debated in the House.

Congressional leaders defend their actions by saying their financial advisers do their trading without consultation, or that representatives’ spouses are the ones directing the trades, or the trades are coincidental.

An End in Sight?

Former Rep. Brian Baird, D-WA, told “60 Minutes” correspondent Kroft that the insider situation in Washington is worse than ever. He said there’s a “political intelligence” industry in our nation’s capital involving former congressmen and staffers hunting around town for nonpublic information they can sell to hedge funds and traders.

And until all of our political leaders are considered “insiders,” this activity will continue legally unless Congress itself does something about it.

Baird spent about six years during his time in office – he retired last year – trying to gain support for the “Stop Trading on Congressional Knowledge,” or STOCK, Act. Together with Rep. Louise Slaughter, D-NY, and Rep. Tim Walz, DFL-MN, he introduced the act that would make it illegal for Congress members to trade stocks on nonpublic information, as well as change financial reporting requirements to every 90 days instead of one year.

Not surprisingly, the movement got little support.

“The first time this legislation was introduced, 14 people endorsed it,” Victoria Dillon, Slaughter’s press secretary, told MarketWatch. “The last time, it got nine. Congresswoman Slaughter is saying, “We shouldn’t have the opportunity to do this. It shouldn’t be legal. This is not one of the more complex pieces of legislation. This is common sense.’”

But shedding more light on the problem could start to change things. Sunday’s “60 Minutes” segment triggered new support for the bill.

Sen. Scott Brown, R-MA, on Tuesday introduced the STOCK Act of 2011, prohibiting members or employees of Congress, as well as executive branch employees, from using nonpublic information gathered through their public service for investing or any attempt at personal financial gain.

“Members of Congress should live under the same laws as everyone else,” Brown said in a statement Tuesday. “If they trade on inside knowledge to line their own pockets, they should be punished. Serving the public is a privilege and honor, not an opportunity for personal gain.”

Related Articles at Money Morning

It’s Not Just Congress – the System Has Failed

Related Articles at Global Economic Intersection

Insider Traders in Government (GEI News)

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